An investor seeking exposure to the drug sector can look no further than the Dow 30, home to two of the biggest drug equities around: Merck (MRK - Free Merck Stock Report) and Pfizer (PFE - Free Pfizer Stock Report). Indeed, this is a good starting point for those looking to add a very safe, yet solid money-making, investment to a well-balanced account.
At first glance, the two blue chips appear to have similar, if not virtually identical, characteristics, with minor differences. To begin with, both have a Timeliness rank of 3 (Average), as shown in the Ranks box, indicating that price performance for the year ahead is likely to be on par with that of the broader market. That’s not surprising, though, since few Dow stocks are known to be good short-term performers ranked 1 or 2 (out of 5).
Both also have similarly low-risk profiles, with top-notch Safety ranks of 1 (Ranks box) and Financial Strength scores of A++, as displayed in the Ratings section at the bottom right-hand corner of the Value Line page. These metrics largely reflect the companies’ strong financial positions, highlighted by solid balance sheet fundamentals that include a sizable cash hoard and a very manageable level of debt (each with about 30% of total capital). As well, stability indicators are highly favorable for both equities, with each getting a Price Stability mark of 90, while the beta Coefficients are .80 and .85 for Merck and Pfizer, respectively, implying lower volatility than the general market (where 1.00=Market).
The P/E and Relative P/E ratios (found in the Top Label) for the duo are nearly identical, though valuations appear to be on the high end, when compared to historical ranges over the past decade (Statistical Array). Yet, when compared to the median P/E for all stocks under Value Line’s coverage, neither issue seems outrageously pricey.
Interestingly, the two drug manufacturing titans share more than just a few similarities on our Value Line Investment Survey page. Both Merck and Pfizer have comparable storylines, with each facing heightened generic competition due to the loss of patent protection on their blockbuster drugs, as discussed by analyst Michael Ratty in the Commentary. Indeed, Merck has struggled to improve sales, which have been steadily declining since 2012 following the patent expiration on well-known asthma medication Singulair. While near-term weakness is likely to persist, the company is counting on key pharmaceuticals including Januvia/Janumet, a couple of recent drug approvals, and a few late-stage opportunities, to contribute meaningfully to its top and bottom lines in the coming years.
Likewise, Pfizer has seen generic rivalry intensify after its blockbuster cholesterol drug Lipitor lost patent protection in late 2011. Although gains from several of its other top-selling medications, including Lyrica and Prevnar, and to a lesser extent, Enbrel and Celebrex, have served as an offset, the drugmaker remains focused on reviving sales growth and strengthening earnings in the years ahead through its pipeline of promising drugs. A potential acquisition of AstraZeneca (AZN) or another pharmaceutical company is not off the table, either.
Yet, as similar as these two blue chips are, there are some differences. For one thing, when comparing the 3- to 5-year Projections, we find that Pfizer appears to offer better total return prospects on a risk-adjusted basis. That factors in price-appreciation potential and prospective dividend payments through mid- to late decade. By contrast, total return possibilities are minimal for Merck at the price level shown at the top of the page.
Another noticeable difference is the Dividend Yield (located in the Top Label). While both Dow members boast a healthy dividend yield, well above the Value Line median, Pfizer (at 3.5%) surpasses Merck (at 3.0%) in this regard, too. That means the expected return from cash distributions on the equity over the coming 12 months is greater for Pfizer. We also note that the former has a higher payout ratio, as illustrated by the All Dividends to Net Profit figures in the Statistical Array. Other elements further support the case for Pfizer, which make it a somewhat more attractive pick for its income component. Specifically, the analyst’s projection of a dividend growth rate of 6.5% for Pfizer, versus Merck’s 2.5%, as shown in the Annual Rates section, suggests heartier increases are likely on tap for PFE down the road.
Looking at the big picture, it is clear that, although both blue chips are appropriate for conservative, income-minded investors, Pfizer comes out slightly ahead in this race and is thus an overall more rewarding choice.